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To over simplify it, you have a million people buying the index, that gets spread out over all the stocks, locking in their respective valuations, if lots of people buy the indexes, those stocks will all go up irrespective of their underlying value.

The way that the ETFs rebalance also plays a role, but that’s a bit more complicated than I can articulate.

If by “everyone” you include those who would otherwise have been stock picking, then yes. Those stock traders are the ones who “calibrate” the price of the stock to its value. If everyone is investing in aggregates, how will the constituents of those aggregates be kept at a price close to their intrinsic value?

The theory is if everyone indexed the established money keeps valuations stable and the underlying fundamentals could get out of line over time. However, it has been shown that only about 20% of the market needs to be active to keep this effect from happening. Nearly everyone who espouses the less efficient theory is a money manager and is trying to keep their livelihoods intact.